Capitalism’s Invisible Hand Doesn’t Generate Public Good

If you came into a windfall, would you be more enthusiastic about buying yourself something big or giving to charity? If honest, most of us would admit that buying ourselves something big would be the more motivating prospect. Direct benefit to ourselves is generally more motivating than distributed benefit to others.

Apply this to large institutions and you’re confronted with a fundamental feature of capitalism. In a competition between for-profit and non-profit campaigns, the for-profits have a motivational advantage. They’re buying themselves something big. Their campaigns reward directly. Wealthy individuals and corporations serving self-interest will generally prevail against non-profit campaigns in the public interest. A self-funding campaign beats a charity-funded campaign almost every time.Libertarians recognize this. It's why they say that for-profits are so efficient. But efficient at what? Not promoting general welfare.

Capitalism’s invisible hand does not promote general welfare. Leading economist Paul Samuelson describes his dawning recognition of this: “All of my teachers believed there was something to Adam Smith’s invisible hand—that each person pursuing their self-interest would, by some miraculous action of the invisible hand, be led to contrive in some vague sense the best interest of all. However, none of them could explain properly what the truth and falsity was in that position. I would say that if I had been a bright student in 1894 and read Pareto’s Italian journal article, I would have understood what I now understand to be the germ of truth in the invisible hand argument. All it refers to is the avoidance of deadweight loss.”

The point here is that Smith’s invisible hand does nothing to achieve ethical maximization. Pareto optimality (the thesis of the Pareto’s Italian journal article) is simply the condition in which there’s no more room for a better deal between any buyer and seller. Everyone is getting the best deal possible given their resources, and there’s therefore, no “deadweight loss,” no one paying too much or too little for anything given available supply and demand.

Capitalism’s invisible hand just produces market efficiency, everyone buying and selling at the most efficient price. According to idealized capitalist market theory, the rich can buy luxury goods at fair market price and the poor can buy what little they can at fair market value..

And that’s just market theory. In practice, the rich can campaign profitably to promote laws that advantage themselves, while the poor can have bake-sales. In practice, capitalism undermines general welfare as we see in all kleptocracies, including the one coming soon to a government near you.

Libertarians either ignore this inconvenient truth, argue for the near elimination of law (since it can be distorted by the rich) or more often, claim that Pareto optimality is the definition of ethical maximization, in other words, that there’s no higher ethical objective than market efficiency.

They’d like to see everything run as a business, including non-profits and government services, with resources and power allocated merely as a function of what people are willing to pay – no obligation for anyone to demand anything that isn’t their personal priority. They lean heavily on the assumption that freedom to do what you want with your resources is the supreme moral virtue. Maximize that and you’ve optimized the public good.

There’s no precedent of this libertarian vision achieved, stabilized or working well in human societies. Still, libertarians can point to long-standing precedent to justify their argument that markets define morality.

In the dog-eat-dog Darwinian world, Pareto-optimality is the norm. Predators get all the prey they can catch. In ecologies, there’s not some ethical social order constrains who gets what. In nature. By the law of the jungle, one’s means are the only constraint on achieving one’s ends. If one can get away with it (in the case of prey, literally getting away) then one can get away with it. Simple as that.

So why not apply the same Darwinian logic to human ethics? Chiefly because of two differences between us and other creatures, both of which are products of humankind’s unique symbolic-competency. Our fluent use of symbols (language, math, equations, schematics, etc.) is the core difference between us and other organisms.

Language is at the heart of our unprecedented empathy, our ability to imagine in worded detail what it’s like to be someone else. Think about the last time you felt guilty about slighting someone. Language brought that guilt home to you. You used words if only in your mind to imagine what it was like to be that other person. A mental picture is formed of a thousand words, words that enable us to draw parallels between ourselves and others, and therefore to care about other people’s welfare. Through language we reason about morality, about what’s good for more than just ourselves. The world we wake up into is profoundly unfair. Through language we humans evoke empathy and reason about fairness and how to achieve it.

Libertarians suggest that you can fold our language-enabled empathy right into capitalism as just another human demand. If people feel empathy for others they can demand more empathy in the marketplace and therefore support more non-profit public welfare campaigns.

But empathy isn’t that simple. To take revenge, torturers empathize with their victims, picturing (with a thousand words) how to inflict greatest pain. Language also makes the our unique capacity for self-pity and self-rationalization possible.

What do you get when you cross an appetite for direct benefit with a capacity for language? You get language that rationalizes why you deserve direct benefit.

Language therefore makes us thus both more motivated to work for the common good and more motivated to work against it. You won’t find a more charitable or belligerent species on the planet than us humans.

The second consequence of our symbolic-competency is our ability to design technologies powerful enough. In the unconstrained capitalist dog-eat-dog competitive game that libertarians idealize, there’s nothing to stop the bigger dogs from destroying the game board.

Libertarians extol unfettered free speech too, capitalism as applied to propaganda, another technology exclusive to humans, the symbolic species. Consider a competition between someone who will say or do anything for personal profit, and someone who serves both self-interest and social welfare. In a contest between the two fisted self-interest with no pulled punches, and someone who ties one hand behind their back, fighting to maintain civility, honesty and realism so as not to destroy the game board of civil discourse. Unfettered self-interests prevail in such a contest. We see it in sensationalist populism, the likes of which has come to a government near you.

Jeremy Sherman is an evolutionary epistemologist studying the natural history and practical realities of decision making. Read his work at Psychology Today